The dollar's trajectory faces volatility as political shocks reshape market confidence

Trump's Dismissal Controversy Shakes Markets

On Tuesday (August 26), the US dollar index slightly retreated to 98.21, a drop of 0.23%. The catalyst behind this was President Trump's sudden announcement to dismiss Fed Governor Lisa Cook. Trump accused Cook of irregularities in loan information disclosure, which Cook firmly denied, asserting that the President lacks the authority to dismiss a governor. This controversy not only kindled political fires in Washington but also swiftly rippled across global financial markets.

Traders are generally concerned that an erosion of the Fed's independence could mean monetary policy becomes more susceptible to White House influence. The market quickly priced in this political risk, pressuring the dollar, while the Euro and Pound strengthened, and the Yen and Swiss Franc appreciated slightly due to safe-haven demand.

Bond Market Signals Divergence: Short-term Eases, Long-term Inflation Concerns

The U.S. Treasury market was also affected by these fluctuations. The two-year Treasury yield fell to 3.694%, reflecting increased market confidence in a Fed rate cut in September; however, the 10-year and 30-year Treasury yields rose to 4.287% and 4.939% respectively. This "short end down, long end up" phenomenon indicates that investors are betting on short-term monetary easing while harboring doubts about the Fed's long-term ability to control inflation.

The steepening yield curve also highlights the uncertainty of policy trajectories: even if the Fed accedes to market expectations with rate cuts in the short term, persistent political influence over monetary decisions could risk a future resurgence of inflation.

Technical Analysis: Dollar Range Fluctuation Unchanged

From a technical perspective, the dollar index remains in a fluctuation range of 97.56 to 98.83, without showing a clear trend. The brief break above 100.25 at the beginning of the month failed to hold, indicating weak upward momentum; the 200-day moving average at 102.75 stands as an elusive "ceiling."

Market participants note that the 50-day moving average around 98.10 provides short-term support, while 97.55 is a key defense level. If it breaks below this level, bears may drive the dollar index further down to 96.38. However, if the dollar can reclaim and hold above 98.83, it may potentially challenge the long-term resistance at 99.84.

Political Interference and Data Tests

Trump's actions undoubtedly deepen market fears about political infiltration into monetary policy. With Powell already sending dovish signals, if the Fed is seen as lacking independence, its policy outlook will become more uncertain.

Simultaneously, investors are closely watching the upcoming PCE price index release this week. This Fed-favored inflation gauge will be a crucial reference for the September decision. If data shows persistent inflation, the market's optimistic expectations for a rate cut may be dampened; conversely, if data is mild, it will reinforce the short-term pressure on the dollar.

The Dollar Still at a Crossroads

Overall, the dollar, under dual political and economic pressures, tends to weaken in the short term but shows no signs of systemic collapse yet. Key future variables include whether Cook can retain her governorship through legal means, if the Fed will proceed with the anticipated rate cut in September, and whether macro data such as the PCE can provide new directional guidance for the market.

Trump's "intervention storm" may just be the beginning. If the White House continues to attempt to control Fed positions, the uncertainty surrounding the dollar's future will be further amplified. For global investors, the dollar is no longer merely a matter of interest rate and inflation games, but also a struggle between political power and an independent central bank.

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.